The Guardian newspaper has called the energy price cap, “one of the biggest shake-ups of the energy market since privatisation”, but why is it so important? It affects 15 million households in the UK, but with 27.8 million households in the country, does it affect you? In this article we will answer these questions and more.

What is the energy price cap?

The energy price cap sets a limit on the amount your energy company can charge you per kilowatt hour (also known as kWh, these are the units of energy that both gas and electricity is charged in). It does not cap or limit your total bill, which depends on how much energy you use.

If kWh of energy were pints of milk, a price cap would mean that milk providers cannot charge more than a certain amount per pint (say £1.50). But if you drink a lot of milk, you will still have a large milk bill.

The energy price cap only applies to certain energy customers, specifically if you are on:

  • A default tariff – you will be on this tariff if you have never switched energy supplier or only switched once
  • A standard variable tariff – you will end up on this sort of tariff when your fixed term tariff runs out and you haven’t switched to a new one, it is called ‘variable’ because the price per kWh varies according to the energy market
  • Or if you use a prepayment meter

There are two energy caps, set at different rates:

  • Prepayment meter
  • Default tariff

So, the energy price cap will not protect you if you are on a fixed-term energy tariff. That sounds bad, right? No! Fixed-term energy tariffs should always be cheaper than the ones that are protected by the energy price cap. The price cap was created to help those people who don’t shop around for a good deal on their energy.

If we take the example of milk again, the price cap only affects those who have a rolling contract with their milkman (or woman), who unbeknownst to them keeps on cranking up the price. If you shop around for the cheapest pint of milk then you are not protected – because you don’t need to be.

The history of the energy price cap

Until gas and electricity was privatized in the 1980s, government-owned regional companies, generally known as the electricity board and the gas board, provided our energy. We took what we were given in terms of price and service. Privatisation meant many companies could compete against each other to provide the best service and the lowest price. Fantastic!

Except things didn’t work out quite as planned.

In 2014, Ofgem (the Office of Gas and Electricity Markets, the government department that regulates the electricity and gas markets in Great Britain) published a report that assessed the competition in the retail energy markets. The report found a number of problems with competition in the energy markets.

In other words the markets, which are meant to reduce prices for us consumers, weren’t doing that. One of the key reasons for this is what Ofgem called ‘weak customer response’. That is, because not enough people shop around for good deals, so energy companies don’t have to reduce prices.

The 2014 report made lots of recommendations, including for an investigation of the ‘big six’ UK energy suppliers by the Competition and Markets Authority (CMA). This CMA investigation itself made a number of recommendations in a report published at the end of 2016. One of these was for ‘price cap remedies’. So, the first energy price cap was introduced on 1st  January 2019.

The price cap was brought in to protect those people who have        never switched energy supplier or only switched once. You might think that is a small minority of people, but actually it amounts to more than half of all consumers.

How does the energy price cap work and how is it calculated?

There is a separate energy price cap for electricity and for gas. In both cases, Ofgem look at the price of wholesale energy and set the cap at a price they think is fair.

Ofgem calculates the price cap in February and August. You can subscribe to email updates on their website for more information about the changes. They then set a new cap on the 1st April and 1st October of the year.

There are eight factors that influence the price at which energy is capped, the largest four being wholesale costs, network costs, policy costs and operating costs.

The energy price caps for both default tariff and prepayment are then published on the Ofgem website for the next six month period. You can also find out more about the eight factors that influence the price cap there too.

What is the latest energy price cap figure?

1 April – 30 October, 2020:

The default tariff cap: £1,162 [Ofgem source]

Prepayment meter cap: £1,200 [Ofgem source]

You will be glad to hear that both energy price caps fell by 1% compared to the previous period (1st October 2019 – 31st March 2020).

What does energy price cap mean for you?

If you are on a default or standard variable tariff or if you use a prepayment meter, the energy price cap will mean that you have lower bills. However it is possible to have much lower bills if you switch to a better deal.

The best way to find a better deal is to use an auto-switching service that will hunt around to find the best energy deal for you. We make some helpful recommendations for finding the company for you in our energy auto-switching guide.        

When the energy price cap was launched in January 2019 Dame Gillian Guy, the chief executive of Citizens Advice, issued a statement that sums up the situation rather well: “The introduction of this cap will put an end to suppliers exploiting loyal customers. However, while people on default tariffs should now be paying a fairer price for their energy, they will still be better off if they shop around.”

Dame Guy went on to give some useful advice in these times of climate change: “People can also make longer-term savings by improving the energy efficiency of their homes. Simple steps, such as better insulation or heating controls, are a good place to start.”

So, shop and around for the best energy deals and try to make energy efficiency savings where possible.